Which startup odds do you prefer?
50% odds of making $1 million
20% odds of making $20 million
Assume the work involved is the same, and that in both cases that the alternative is a complete loss. If you’re economically rational, you’ll compute the “expected value” of each investment.
50% of 1 million => 500k
20% of 20 million => 4 milion
I’m not a millionaire yet, so I’d choose option 1. Wouldn’t you? A VC has to be rational to maximize return for their partners. They have to be rational. And that’s the crux of the problem: our incentives are not aligned.
We don’t have to play by the same rules. Just as the cost of starting a company has been going down, it’s also become less risky to pull off small successes.
20 million isn’t 20 times more useful than 1 million. It won’t make you 20 times happier or let you be 20 times more effective. But 1 million is more than enough fuck-off money for most hackers.
Fuck-off money a term I first saw used by Taleb. The $35 million he made in 1987 allowed him to write books and ponder epistemology.
Startup founders are often in it to get their fuck-off money. Sell out for $50 or 100 million, the thinking goes, and you’re off to a beach to sip margaritas and listening to Jimmy Buffett.
Most hackers I know would itch to get back to code or do something weird like install an RFID on that new shaker of salt, so you’d always know where it was. But eventually you’d want to do something fun and meaningful.
Maybe that’s working as a chef, volunteering setting up wireless networks in developing countries or taking over a night club. Whatever it is, you probably don’t need $100 million.
What’s your fuck-off threshold? How much is enough?
You may find that your current situation won’t afford you the fuck-off money you need. Take a startup employee that was hired late in the game with 1% of the company in stock options. If the company sells for $20 to $50 million, they make $2-500k. Making that 1st million would require a home-run. In some places, that’s not even enough to buy your home. Imagine: winning a startup bet and still paying a mortgage. Ouch.
For some people, there’s no need even for that 1st million, since they’re already doing what they love. If given a million dollars, one of my friends would be traveling to different cities to dance, all the while helping build open-source communities. Because that was the life he wanted, he applied at a company that allows telecommuting. Now he can move to a new city for 3 months to check out their dance scene. It’s a sweet setup; I’m envious.
If you’re just after fuck-off money, taking VC funding might not make sense. If money is a secondary motivation - and the startup itself is meaningful work you’d do even if you were already a millionaire - then your incentives may be aligned.
Even when it makes sense to look for external funding, there are other reasons some VC’s should be avoided; I’ll talk about that in part 3
(In the meantime, there’s part 1)
18 comments ↓
It’s actually hard to evaluate how much money you need. 1M$ will allow you to live as if you were to earn 100K per year for roughly 10 years. That is if you do not burn your money like a mad man. 100K$ is a lot for most of us but remember, you’ll think you’re rich so you’ll probably spend more money. I think it’s the human nature to show off… Plus, inflation will kick in and so on…
You might be able to strech it a little bit by investing. Then again, you might lose a lot too, especially these days where pretty much everything is crashing. Housing and many stock indexes are tanking while gold has been like a roller coster in the last 2 years. But anyway, that’s another story.
So 1M$ gives you 10 years of beach bumming. Then what? If you haven’t caught up on the latest wave (technical that is - not the real wave), you’ll end up washing dishes at McDonalds. Working can prevent this. Who will want to hire a beach bum after 10 years of not doing anything? No one. Even if you become a “consultant”, where will you go without contacts?
So the way I see it, you have 2 options:
1. Earning fuck off money will only shorten your workable period. Instead of working until 80 years old, you might stop working at 40, 50 or 60. I know it doesn’t sound sexy to stop at 60, but with rising cost of living and debt, I think we won’t have any choice but to work until we die.
2. Earning fuck off money will allow you to breathe a little bit more than the average joe. You’ll buy a house or pay off your mortgage then continue as if nothing had happened. The good thing is that you’l have a few extra hundreds $ per month to have fun, to take a vacation and so on all because your mortgage will be paid off.
Back to your question (1M vs 20M) I’m a hit and run type of person. Get the loot then start over. It might not work the 2nd time but a bird in the hand is worth two in the bush (this appears to be the correct translation of “Un tiens vaut mieux que deux tu l’auras”)
As for me, I’d leave this world and hit the beach for 5M$
I would probably still work somehow, like own some surf rental shack on a beach. 5M$ well spent will allow me and my family to live more than confortably. The place you live also matters a lot. You can get an excellent 3 course meal in some places (South America) for 5$. In London, you’ll only be able to buy a bottle of water for that price…
@Daniel: Great article
@Denis: I see it the other way. Given a million dollars, I wouldn’t see it as a clock ticking down to bankruptcy. I’d see it as a huge cushion to:
- work on my own software projects
- spend months learning new technologies that intrigue me by working on open source software that use them
- a great opportunity to join a startup I’m interested in in exchange solely for stocks
- a great opportunity to just decide to work a few hours a week or a few months a year and do other stuff on my newly found time
In all of these courses of actions, however, there would be one constant: I’d develop software.
OTOH, the person who would completely abandon software development to drink/travel/do sports/whatever is not completely lost either. They probably weren’t in a career that they liked so much. With money and experience in the aforementioned fields, they may just end up starting a new career: start a club, get into the traveling business (books, counseling, agencies), start a sports-related resort/store or whatever.
In other words, fuck-you money lets you steer your life/career wherever you want it to go and meet the opportunities there. It doesn’t exclude someone beach bumming for 10 years and sinking into irrelevance, but I definitely don’t think it would be the outcome for most people.
Given the money I would pay off the mortgage and then either return to University or take a job that paid less but was more interesting.
I depends, the opportunities that 1m offers are not the same as what 10m offers. 1m is not that much if you think you might have to live on it for the rest of your life.
[…] hackers discussing what it would take to get out of the game or fu**-off out of it as they put it. (http://www.danielharan.com/2008/09/04/vc-part-2-fuck-off-money/) Which startup odds do you […]
$440k. done.
here’s the rationale:
$200k pays off all the debt i have: mortgage, car, everything, and should leave me with $50K in a working capital cushion. i would continue to work on something, because i’d go crazy if i didn’t, but it’d likely be another startup idea of some sort.
$240k goes in a ladder of 1 year certificates of deposit at $20k each. at around 4% interest, each one will yield an income of $800/month. one can leave that in the bank, or take it out as income. given that we’re at record low interest rates, that rate can be expected to go up.
my monthly expenses once housing and car payment are removed are right at $300. $800/month leaves me $500 for food and incidentals, assuming i don’t have other income. no, it’s not lavish, but it works. and every single penny i make from paying work i can then blow on hats.
If I could ever get that $1mil-ish payday, I’d probably look into setting up a Vanguard Managed Payout fund and live off the monthly distributions from that pretty much forever. The upshot is that, if I understand how these things work, in theory I wouldn’t really need to worry about saving for retirement from my monthly distributions, either, because they can be set up to grow their monthly payouts at or above inflation rates. (although how this all works with taxes is still a bit of a mystery to me) With around $1.1mil, I wouldn’t be able to increase my lifestyle right now, but in theory, I’d never again have to work a job just to pay the bills.
@denis: no way could I ever be a beach bum for 10 years. Your point is well taken though: you would be irrelevant in the market place after that much time surfing.
Doing that for 6 months probably won’t have a huge impact. And as you say, you can get a fine meal for $5. If we’re as creative with how we spend the money as we are making it, $1 million really is a lot of money.
@Mathieu Thanks!
And hey, when are we going to pair-program?
@Peter You’re right that $1 million is not much to retire on - although clearly that’s not my goal either
University does sound interesting. Being able to afford MIT or Stanford - that would be amazing leverage for whatever other adventure I’d want to go on next.
“Fuck off” or “Fuck you” money phrase is older than dirt.
Let’s see. Average good salary for a developer would be $100k/yr and say that you’re 30 years old. If you need an income until you’re old enough to ‘retire’ (say at 70 years old), that would be $4M (40 years * $100k/yr), to just keep your home paid for and gas, a new car every 5-10 years, etc … So anything greater than $4M (assume another $1M for experimental costs for the next 40 years - servers, hosting, …). My answer: $5M minimum to fuck off for the rest of my life.
1 million will buy you a house in the valley. be happy with that
i speak as someone who cashed out under 10mln in “bubble 1″…1 million in the valley is nothing. sorry.
The cost of starting a company is the same as it’s always been. A web2.0 product does not a company make.
[…] VC Part 2: F***-off Money Which startup odds do you prefer? 50% odds of making $1 million or 20% odds of making $20 million. Assume the work involved is the same, and that in both cases that the alternative is a complete loss. If you’re economically rational, you’ll compute the “expected value” of each investment. […]
If i need money i pick option 1.
If i want to get rich and risk a bit I go option 2.
Unfortunately most will make 100% not a lot of money…
Probably around 2 millions.
Take out the amount for a decent place to live here (Montréal) or somewhere else not crazy expensive like the valley, should leave a good 1.5 million I can invest this in something stable, live off of the interest while even leaving some of that to raise the base capital slowly, compensating for inflation.
Many commenters seem to use 100K as a base point, here and in a number of countries, I can live very easily at 60-70K a year and that’s without making an effort AND paying income taxes, I could cut back even more by living part of the year in Mexico or Thailand. PLUS I’d add some revenue because after 6-8 months off I’d spend 2-3 days a week on new projects which would bring in some money so I could leave even more of the interest piling on to the base amount.
Now where do I get that 2mill?
Where I live in Europe, life is a bit different than all other comments. $1M (even converted to Euro) would be enough for the rest of my life to live of the interest. I can get like $40-50k/year in interest which is enough to buy a house in the first year (completely paid…) and put 50% aside to grow the 1 million$ to counteract inflation. $1000-2000 a month is more than enough where I live and prices are actually moving down here instead of up.
I find it kind of weird that people would want to live in places where you have to pay 1 million or more for a house. But to each his/her own. I opted for the lowest risk (as far as there is such a thing without getting some shitty job) and got close to $1M when I sold my company. I now do my own little projects but I never ever have to worry about money or a root over my head.
I recall in Neal Stephenson’s book Cryptonomicon, the hacker characters used the term “fuck you money.”
So if I’m talking to VC firms, I can use these terms in our talks? cool!
Leave a Comment